Efficient Use of the Factors of Production

Economic growth is based on an economy's ability to produce goods and services. Production occurs when people use the factors of production, or productive resources, to produce these products. The three main factors of production are natural resources, human resources, and capital goods. These resources are unevenly distributed in the world. Yet to achieve economic growth societies must acquire and use resources in efficient and innovative ways.

Natural resources, or gifts of nature, are things present in the natural environment that are used in production. Natural resources include minerals, oil, natural gas, rivers, oceans, fish, animals, soil, forests, plants, and sunlight. Natural resources provide many of the raw materials needed to produce goods and services. At times a variety of natural resources are available within a region or a country. The United States, for example, has abundant fertile land, forests, navigable rivers, deep-water harbors, and minerals. In other countries economic activity sometimes centers on a single resource such as crude oil in the Persian Gulf nations of Kuwait, Saudi Arabia, and the United Arab Emirates. Still other countries lack domestic supplies of key resources but are able to acquire them through trade or foreign investment. For example, Japan's meteoric economic growth during the post–World War II era relied on the import of petroleum, minerals, timber, and other natural resources not readily available within its borders. Similar trade and investment opportunities have promoted rapid economic growth in China and in the Newly Industrialized Asian Economies (NIEs), including Hong Kong SAR, Korea, Singapore, and the Taiwan Province of China.

Human resources are the people engaged in production. Human resources include assembly line workers, miners, contractors, and farmers in the goods-producing sector and teachers, doctors, and engineers in the services-producing sector. Investments in human resources create human capital. Human capital represents the expanded abilities and skills workers acquire through education, apprenticeships, or other training. Skilled, healthy workers are generally more productive and contribute more to a country's economic growth than poorly trained workers. The advanced economies make significant investments in human capital. The United Nations found that students in countries with “very high human development” averaged 11.5 years of education, compared to just 4.2 years of education for students in “low human development” countries. Predictably, the countries with high levels of education were among the most advanced and prosperous in the global economy, while countries with low levels of education were among the poorest.[1]

Capital goods are items that are used to produce other products. Capital goods include construction equipment, mine shafts, factory buildings, and tractors in the goodsproducing sector and television cameras, surgical instruments, and information processing equipment in the services-producing sector. Investment in new capital goods increases a nation's capital stock, the total amount of capital available to produce goods and services. Expanding the nation's capital stock supports the goal of capital deepening, which occurs when a nation's capital stock per worker increases over time. Capital deepening is essential to economic growth. Heavy investments in new capital goods by the NIEs over the past few decades, for example, enabled these economies to rise into the ranks of the advanced economies.

A nation's capital stock supports growth only if this capital is employed in production. In the U.S. economy the capacity utilization rate measures how much of its productive capital is employed at any moment in time. During periods of economic expansion the capacity utilization rate typically exceeds 80 percent. During economic downturns the capacity utilization rate drops. The capacity utilization rate dipped as low as 68.6 percent during the Great Recession in 2009, when nearly one-third of the country's productive capital sat idle for a period of time. A tepid economic recovery pushed the U.S. capacity utilization rate to 78.7 percent by 2012.[2]

  • [1] United Nations Development Program (UNDP), “Table 1: Human Development Index and Its Components,” Human Development Report, 2013 (New York: UNDP, 2013), 144-147
  • [2] Council of Economic Advisors, “Table B-54: Capacity Utilization Rates, 1965–2012,” Economic Report of the President: 2013, 2013, 387
 
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